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How to get the most out of your access bond

The secret lies in managing your funds; Std Bank on its AccessBond.

JOHANNESBURG – An access bond can be used as an effective tool to manage your money and to pay off your property. It is a mortgage account that is flexible and simple and gives you access to funds accrued while paying off your bond.

If, for instance, you purchase a home worth R1m and pay the monthly instalment plus an additional R1 000 a month, Absa property analyst, Jacques du Toit, says you will save very little in interest in the first year or so. This is because you will only have paid off an extra R12 000 in capital on the initial amount of R1m.

Du Toit says on a 20-month mortgage of R1m, you will have repaid R19 902 in capital in the first year, which would have been R31 902 if you had paid an extra R1 000 a month.

He explains that as time progresses, the outstanding amount of capital will get smaller, meaning the interest component of the monthly instalment will also get smaller as it is calculated on a diminishing outstanding capital amount.

The graph below illustrates the capital and interest portions of a monthly repayment on a R1m mortgage over 20 years.

Sticking with the example of purchasing a R1m home, FNB says your savings will depend on when you start paying the extra R1 000 a month into your bond. “The reason for this is the interest charge on the bond reduces over time in line with the reduction in capital. For example, if the bond is R1m, the interest charge on month one is in the region of R7083.33 per month. Through the life of the loan the interest charge drops as the capital amount drops and after 10 years the interest charge is in the region of R 4984,06 pm.”

FNB says this is calculated at a rate of 8.5% over 20 years with no additional deposits at a flat rate of 8.5%. Similarly, any additional monies paid into the bond will impact on the interest charged and result in a proportionate savings, given the reduction in the capital amount.

The two graphs below will help illustrate the benefits of pumping spare cash into your bond.

Table 1

Month

Balance

Bond Installment

Interest Payment

Cap Reduction

Additional Payment

1

R 1 000 000.00

R 8 678.23

R 7 083.33

R 1 594.90

R 0.00

2

R 998 405.10

R 8 678.23

R 7 072.04

R 1 606.20

R 0.00

3

R 996 798.90

R 8 678.23

R 7 060.66

R 1 617.57

R 0.00

4

R 995 181.33

R 8 678.23

R 7 049.20

R 1 629.03

R 0.00

5

R 993 552.30

R 8 678.23

R 7 037.66

R 1 640.57

R 0.00

6

R 991 911.73

R 8 678.23

R 7 026.04

R 1 652.19

R 0.00

7

R 990 259.54

R 8 678.23

R 7 014.34

R 1 663.89

R 0.00

8

R 988 595.65

R 8 678.23

R 7 002.55

R 1 675.68

R 0.00

9

R 986 919.97

R 8 678.23

R 6 990.68

R 1 687.55

R 0.00

10

R 985 232.42

R 8 678.23

R 6 978.73

R 1 699.50

R 0.00

11

R 983 532.91

R 8 678.23

R 6 966.69

R 1 711.54

R 0.00

12

R 981 821.37

R 8 678.23

R 6 954.57

R 1 723.66

R 0.00

Table 2

Month

Balance

Bond Installment

Interest Payment

Cap Reduction

Additional Payment

1

R 1 000 000.00

R 8 678.23

R 7 083.33

R 1 594.90

R 1 000.00

2

R 997 405.10

R 8 678.23

R 7 064.95

R 1 613.28

R 1 000.00

3

R 994 791.82

R 8 678.23

R 7 046.44

R 1 631.79

R 1 000.00

4

R 992 160.03

R 8 678.23

R 7 027.80

R 1 650.43

R 1 000.00

5

R 989 509.60

R 8 678.23

R 7 009.03

R 1 669.21

R 1 000.00

6

R 986 840.39

R 8 678.23

R 6 990.12

R 1 688.11

R 1 000.00

7

R 984 152.28

R 8 678.23

R 6 971.08

R 1 707.15

R 1 000.00

8

R 981 445.13

R 8 678.23

R 6 951.90

R 1 726.33

R 1 000.00

9

R 978 718.80

R 8 678.23

R 6 932.59

R 1 745.64

R 1 000.00

10

R 975 973.16

R 8 678.23

R 6 913.14

R 1 765.09

R 1 000.00

11

R 973 208.07

R 8 678.23

R 6 893.56

R 1 784.68

R 1 000.00

12

R 970 423.39

R 8 678.23

R 6 873.83

R 1 804.40

R 1 000.00

 

Assuming you have bought property worth R1m at an interest rate of 8.5% which remains unchanged throughout the first year of purchase, and you pay only the agreed upon monthly installment, your outstanding balance at the end of that year will be R981 821.

However, had you paid an additional R1000 a month into the same bond over the same period at the same interest rate, your outstanding balance would be R970 423. That is a saving of R11 397.

Being an access bond, this will also mean that you will have just over R11 000 available to draw on from your mortgage.

FNB says if one was to pay the extra R1000 monthly for the duration of the loan, it would be paid off within 187 months instead of 240 months as originally agreed to. This amounts to paying it off within just over 18 years as opposed to 20.

The important thing to remember is that if and when you can afford to pay larger amounts into your bond at any given month, it will reduce the original amount owed, leading to lower interest due and paying your bond off even sooner.

All banks offer access bonds and while they might use different names, the facility is the same. If you did not ask for this facility when you first took out your bond, you can apply for it. The bank will then do a risk assessment as required by law to ensure you are not over-indebted.

In the case of Standard Bank: “The outstanding balance of your home loan is reduced when you pay excess funds into your AccessBond account – this means that you pay less interest on your home loan. Because interest is calculated on a daily basis, the benefit is effective from the day on which you deposit the funds.”

Other banks may calculate the interest on a monthly basis. Here it is important to find out exactly when your financial institution calculates interest so that you can ensure that your debit order comes off a day or two before. This will also result in some saving. It may seem insignificant on a month-to-month basis, but it adds up. To try and establish by how much, experiment with the several bond calculators available on the internet to calculate your options.

Another way of saving money is to deposit your salary into your bond account and transfer sufficient funds into your current account to cover all your deductions like debit orders. You must first get electronic access by linking your current or savings account to your home loan.

Home Loans South Africa says any extra funds paid are not locked into the bond and can be withdrawn whenever you need it. There is also no restriction on the amount you can pay into your home loan account. However, some banks do limit the amount you can draw at any given time.

Caution

Du Toit does sound a word of caution against using your long-term bond to finance goods that should be paid off over the short-term, like a car. Vehicle finance is usually granted over a five-year period. Paying it back over the long-term will pile on the interest.

Standard Bank explains that if you have sufficient equity in your home loan for a new car, the best option is to draw the money from your home loan. This will save you around 4% in interest. It will also cut out having to apply for credit with another financial institution.

However, the bank says a car loan should be paid off over a maximum period of five years: “…calculate what you would have paid on car finance and pay that amount into your bond every month…if you pay off your car for 20 years, the car will be long gone and you will still be paying, plus you’ll be paying for the next car as well”.

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